The recent Tax Court case Potter v Commissioner, T.C.M. 2018-153 (T.C. Sep. 17, 2018) provides a great example of the type of protection that a termination clause can provide to a manufacturing representative. In that case, Jeff Potter worked as an independent contractor for a company called Green Country, which was in the business of selling garden soil and other related products. Mr. Potter was well represented when drafting his sales representative contract and was protected by a strong termination clause. The clause stipulated that if his compensation agreement was terminated, he would be owed a termination payout equal to 150% of his commissions from the previous year. When his agreement was terminated, the company compensated in accordance with this clause. The lawsuit that followed did not contest this payment, the dispute was merely over the federal income tax implications of the termination payment.

As we see in Potter, one approach to contracting for compensation in the event the sales representation contract is terminated is to structure it as a payout equal to a percentage of commissions paid over the previous year, or some other period of time. This is of course not the only way to structure a termination clause pay out. Another popular approach is to structure it in terms of a percentage of sales made on accounts that the independent sales representative generated. This, in effect, would allow the sales representative to continue earning a commission on sales that were properly attributable to their own work efforts. In order to provide real protection, termination clauses must be negotiated as a part of the initial contract. As a result, some sales representatives may prefer to structure the clause in terms of a flat rate, like a liquidated damages clause.

A New Jersey District Court has allowed an independent sales representative to proceed with his lawsuit against his principal company for failing to pay his earned sales commissions. This case reaffirms New Jersey’s strong public policy in assuring sales representatives are timely paid their earned sales commissions.

Prior to New Jersey passing the Sales Representatives’ Rights Act, independent sales representatives often faced an uphill battle when it came to legal disputes concerning unpaid commissions. As an independent contractor who is paid on a 1099 basis, New Jersey Wage Payment law does not protect independent sales representatives from being paid their sales commissions because they are not considered employees under the law. In recognizing the need to protect independent sales representatives from receiving their hard-earned commissions, New Jersey enacted the New Jersey Sales Representatives’ Rights Act that allows for sales representatives to sue for their unpaid earned commissions and imposes significant penalties against principals for failing to pay the commissions in a timely manner.

In the recent case TLE Marketing Co. v. WBM, LLC, No. CV-17-11752 Slip Op. (D.N.J. Sep. 14, 2018) the plaintiff raised a novel argument that, if successful, could expand the reach of the Act. TLE Marketing Corporation is an independent sales agency based in Minneapolis, Minnesota, and has been providing marketing and sales representation for companies since 1976. WBM, LLC is a developer, importer, and distributor of a variety of distinctive products, with a primary focus on Himalayan salt products. WBM is based out of Flemington, New Jersey and has been in business for over 20 years. Starting in 2007, TLE and WBM began working together, signing a sales representative contract that provided that TLE would market and sell WBM products. The two companies enjoyed a lengthy business relationship of almost 10 years until, in June 2017, WBM terminated the sales representative contract. In response, TLE filed a complaint in Minnesota alleging wrongful termination, breach of contract, and failure to pay commissions in violation of Minnesota state statute.

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